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Testing for Spurious Dynamics in Structural Models with Applications to Monetary Policy

Author

Listed:
  • Mikhail Dmitriev

    (Department of Economics, Florida State University)

  • Manoj Atolia

    (Department of Economics, Florida State University)

Abstract

We propose a universal and straightforward test for validating assumptions in the structural models. Structural models impose a causal structure, take data as an input, and then produce exact structural parameters. We simulate the new data while breaking the original causal structure. We then feed the model the simulated data and then see whether it produces different results. If its conclusions are the same, then the models’ implications are not sensitive to the underlying data, and the model fails the test. We then apply our test to the models analyzing monetary policy. We find out that simple SVARs successfully pass the test and can be used to identify monetary policy effects. On the other hand, DSGE models estimated via full-information methods such as Smets and Wouters (2007) fail the test and potentially force their conclusions on the data.

Suggested Citation

  • Mikhail Dmitriev & Manoj Atolia, 2021. "Testing for Spurious Dynamics in Structural Models with Applications to Monetary Policy," Working Papers wp2021_10_01, Department of Economics, Florida State University.
    • Handle: RePEc:fsu:wpaper:wp2021_10_01
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    File URL: https://coss.fsu.edu/econpapers/wpaper/wp2021_10_01.pdf
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    References listed on IDEAS

    as
    1. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2009. "New Keynesian Models: Not Yet Useful for Policy Analysis," American Economic Journal: Macroeconomics, American Economic Association, vol. 1(1), pages 242-266, January.
    2. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2007. "Assessing Structural VARs," NBER Chapters, in: NBER Macroeconomics Annual 2006, Volume 21, pages 1-106, National Bureau of Economic Research, Inc.
    3. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2004. "A Critique of Structural VARs Using Real Business Cycle Theory," Levine's Bibliography 122247000000000518, UCLA Department of Economics.
    4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    5. Cooley, Thomas F. & Dwyer, Mark, 1998. "Business cycle analysis without much theory A look at structural VARs," Journal of Econometrics, Elsevier, vol. 83(1-2), pages 57-88.
    6. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    7. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
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    More about this item

    Keywords

    VARs; SVARs; DSGE; monetary policy;
    All these keywords.

    JEL classification:

    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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